When you’re running a business, you have a lot of things to worry about. Tax tends to be one of the last things on your “to do list”. But you shouldn’t ignore it – getting it right can be the difference between a successful business and going bankrupt.

Here are three tax mistakes that could result in a large tax debt. If you can’t pay your tax debt, the ATO can bankrupt you, so it’s important to get things right. I’ve included practical steps that you can take to make sure you don’t make these mistakes.

Mistake 1 – Not putting money aside for your tax

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If you don’t put money aside for your tax, you can end up in trouble.

If you should be collecting GST from customers, you need to remember that 10% of your invoice is not your money. It is tax that you have collected on behalf of the government. Don’t be tempted to spend it – if you do, you will end up with a tax debt to the ATO.

The ATO does not negotiate about GST – you should have collected it from your customers, so the ATO is going to make sure they collect it from you.

The other tax trap is income tax. If you’ve gone from being an employee to owning your own business, you’re used to having your income tax taken out of your pay for you.

When you work for yourself, you need to remember to put your income tax aside. No one else will do it for you.

This is especially true in the first year of business. It is only after you lodge your first tax return as a business owner that the ATO requires you to make quarterly income tax instalments. Before you lodge this first return, the ATO doesn’t know how much you are earning and doesn’t require you to make income tax instalment payments.

This means that if you started your business on 1 July 2018, your tax and tax return for that year isn’t due until May 2020 (assuming you have a tax agent). If you haven’t put any money aside for this tax, you’ll find yourself in trouble. You’re almost two years into your business with no money saved for tax.

3 things you can do to avoid this mistake

1. Set up a separate bank account to put aside money for tax.
2. Depending on how much GST credits you can claim, put aside up to 10% from every invoice to cover GST.
3. Work out how much income you’re likely to have in the year. Then use a website like www.paycalculator.com.au to work out how much tax you would pay on that income, and put money aside every fortnight or month to cover it. Keep an eye on this – if you start earning more or less than you’d expected, you will need to adjust how much you’re putting aside.

Mistake 2 – Not lodging your returns on time

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There are 3 ways that not lodging your tax returns on time could see you end up with a big tax bill.
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1 Losing track of what you owe.
When you don’t lodge your returns on time, you lose track of what you owe. It’s easy to forget that your tax debt is growing, and you may become tempted to spend your money on other things – rather than paying your tax debt. The longer this goes on, the worse your tax problem will be.
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2 Late lodgement penalty
The ATO charges you a penalty every time you lodge your returns late. For a small business, you are charged between $210 to $1,050 for each late return (depending on how late it is). If you’re meant to lodge GST returns every 3 months, these late fees can add up quickly.
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3 Risk of a default assessment
If you don’t lodge a tax return then the ATO is allowed to issue you a “default assessment”. This is the ATO’s guess about the amount of tax that you owe, based on what it knows about you. If the ATO issues you one of these, it usually comes with a penalty of 75% of the tax that you owe. These 75% penalties are very difficult to have reversed.
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2 things you can do to avoid this mistake

1. Download the Australian Taxation Office app – you can use it to find out your key lodgement dates, and even have the app remind you when a lodgement date is coming up. I have done this for myself and now I get reminders in my phone’s calendar 7 days before each due date.
2. If you’re struggling with your paperwork, look into getting a bookkeeper who can look after this for you.

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[callout]Bonus tip – if you don’t lodge your tax returns or Business Activity Statements, the ATO can bring a criminal prosecution for overdue tax returns. [/callout]

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Mistake 3 – Not getting your tax returns right

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Being careless with your tax returns, or not getting the right advice, can come back to bite you.

Tax audits can cost thousands of dollars. If the ATO decides to look at your tax returns, it will ask you to explain your calculations. This can be expensive, particularly when you need an accountant or a lawyer to help you with it.

If the ATO isn’t happy with your explanation, they can re-issue you with a tax assessment based on their calculations. This assessment will usually come with a penalty of 25%, 50% or 75% (depending on whether the ATO thinks you failed to take reasonable care, were reckless or showed intentional disregard for the tax law).

You will also be charged interest on the difference between your reported tax and the ATO’s revised calculations. Also, you will be charged interest on the overdue amounts of tax and penalties.

If you don’t agree with the ATO’s assessment of your tax, then it’s up to you to prove the ATO wrong and show what the right amount of tax would be. You either need to go to the expense of pursuing this, or you need to wear the extra tax, interest and penalties.

Wouldn’t it just be easier to take care in the first place? Make sure you keep records to substantiate your tax returns and get advice to make sure you’re reporting everything correctly.

4 things you can do to avoid this mistake

• Don’t take unnecessary risks with your tax returns.
• If you’re claiming deductions, make sure you can justify them.
• If you’re earning income, make sure you report it.
• If you’re not sure how the tax rules apply to your situation, ask an accountant for help. Don’t just take a guess – it can come back to bite you down the track.

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About Waterhouse Lawyers

We are specialist tax disputes lawyer with over a decade of experience in dealing with the ATO.

We have helped many clients to receive interest and penalty remissions, to object to and appeal the ATO’s decisions and to reach settlements on disputed tax amounts. We also represent clients in court when they are charged with tax related crimes.

We work with clients all over Australia and internationally. We can do this because the tax issues I deal with are Federal – the law is the same no matter where in Australia you live.

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• How does the ATO collect tax debts?
• How the ATO uses legal action to collect tax debts from an individual
• How to ask the ATO for a remission of your general interest charge (or GIC)
• 5 common ways that your ATO payment arrangement can default, and what to do to avoid it